YOUR WILL YOUR SMILE YOUR WAY YOUR VISION YOUR HORIZONS YOUR PEOPLE OUR UNIVERSE YOUR TRUST YOUR DREAM YOUR PASSION. Report and Accounts

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1 YOUR WILL YOUR SMILE YOUR WAY YOUR VISION YOUR HORIZONS YOUR PEOPLE YOUR TRUST YOUR DREAM YOUR PASSION OUR UNIVERSE

2 BOARD OF DIRECTORS AND OFFICERS GENERAL MEETING Chairman Prof. Doutor António Soares Pinto Barbosa Secretaries Comendador Jorge de Sá Dr. José Lino Tranquada Gomes BOARD OF DIRECTORS Chairman Comendador Horácio da Silva Roque Vice Chairmen Dr. Joaquim Filipe Marques dos Santos Dr. Carlos David Duarte de Almeida Directors Dr. Artur Manuel Pires Chambel Dr. António Manuel Rocha Moreira Dr. Manuel Isidoro Martins Vaz Dr. Rui Manuel Silva Gomes do Amaral Dr. Artur de Jesus Marques Dr. José Marques de Almeida EXECUTIVE BOARD Chairman Dr. Joaquim Filipe Marques dos Santos Dr. Carlos David Duarte de Almeida Dr. Artur Manuel Pires Chambel Dr. António Manuel Rocha Moreira Dr. Manuel Isidoro Martins Vaz Dr. Rui Manuel Silva Gomes do Amaral Dr. José Marques de Almeida Supervision Board Chairman Dr. Fernando Mário Teixeira de Almeida Full Members Ernst & Young Audit & Associados S.R.O.C., SA, representada por: Dr. Alfredo Guilherme da Silva Gândara Dr. José Luís Pereira de Macedo Alternate Members Dr. José Pedro Lopes Trindade Dr. João Carlos Miguel Alves (ROC nº 896) Secretary General Dr. Carlos Oliveira Auditors Ernst & Young Audit & Associados S.R.O.C., SA. Board of Directors Artur Marques, Manuel Vaz, Artur Chambel, Marques dos Santos, Horácio Roque, Rocha Moreira, Duarte de Almeida, Rui Amaral e José Marques de Almeida 4

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4 Banif, SA MESSAGE FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS AND THE CHAIRMAN OF THE EXECUTIVE BOARD Banif Banco Internacional do Funchal continued in 20 with a policy of diversification and sustained expansion of its operations, with a view to building up an increasingly strong presence and capacity to intervene in the different markets in which it operates. In an economic climate still marked by a degree of uncertainty as to a sustained recovery, the Bank recorded cash flow in 20 of 68.6 million Euros and net profits of 20.5 million euros, reflecting performance which may be regarded as fairly positive. The reduction of 11.6% in net profits, in comparison with the previous year, is due to the extraordinary results recorded in 2003 in respect of the process of reorganizing the Banif Group s property holdings, which were not repeated in 20. In 20, Banif Banco Internacional do Funchal continued to pursue its business within the broad strategic guidelines mapped out in the past, which involve client focus and the provision of a personalized service, the offering of a full range of financial products and services, distribution by segments and through multiple channels, consolidation of cross selling and leadership of the market in Madeira. 5

5 Amongst other developments in 20, the Bank achieved growth in its client base, at the same time as proceeding with internal reorganization, with a view to enhancing efficiency of service and the quality of the services offered. In order to achieve growth in Mainland Portugal, the Bank needs to gain new clients, and this was one of the central goals in 20, with the launch of the 50,000 Programme, the success of which actually exceeded the objectives set. The momentum created has served as encouragement for pursuing efforts to extend the client base, which remains an ongoing project and a challenge to our business capacity. Of the various initiatives in the area of internal reorganization, that with the most direct impact on the efficiency and quality of our services was the Project for Operational Improvement of the Branch network, developed and implemented in 20. In addition to reducing the administrative workload at the branches, freeing up time for dealings with clients and for sales work, this project, implemented jointly with Banco Comercial dos Açores, has also made it possible for customers of each bank to be served and to carry out banking operations at branches of the other bank, thereby adding to integration and synergies within the Banif Group. Banif has also continued to display a commitment to the cross-selling process, making an important contribution to overall performance in the sale of products and services offered by Banif Group companies. The branch network has played a major role in this, and in 20 was extended to include 7 new branches, in Cancela Park (Madeira), Braga (Lamaçães), Lagoa, Cacia, Vizela, Ponte de Lima and Barreiro, increasing the total number of branches to 156, of which 33 are located in Madeira. 6

6 Banif, SA MESSAGE FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS AND THE CHAIRMAN OF THE EXECUTIVE BOARD (cont.) The ratings initially assigned by the Moody s and Fitch agencies in January 2003, of Baa1 and BBB+, long term, and P-2 and F2, short term, were confirmed on two occasions during the year, in March and November. This was highly positive for the Bank s operations, providing proof of its stability and helping to promote acceptance of the bank in the international capital markets. The policies of expansion and modernization which have been consistently followed by the Bank have allowed it to achieve a high profile and a sound reputation in the market, which would undoubtedly not have been possible without the dedication and commitment of our employees, to whom we express our appreciation. However, the increasingly fierce competition in the markets in which we operate, and the high standards we set for ourselves in terms of customer service, place an unending series of new challenges in our path, and set new targets for the future. We have therefore adopted the objective, as part of our strategy thrust for the next three years, of establishing Banif as a benchmark bank, with the best service standards as perceived by customers. In order to achieve this, Banif will build on its personalized relationships with clients in order to offer a rigorous service characterized by rapid response, supported by high quality standards and a comprehensive range of financial products, backed up by efficient and rigorous operations. This is an ambitious but stimulating challenge, which we approach with assurance, in full confidence that we may count on the motivation, dedication and expertise of the Bank s employees. 7

7 In summing up another year of banking operations, in which new and important steps were taken in the direction of expansion and progress, we wish once more to express our thanks to all those who have accompanied our endeavours in particular the regulatory authorities and the Madeira Regional Government and, especially, our customers, who are the prime reason for our existence, and to whom we look forward to offering an increasingly valuable service. Horácio da Silva Roque Chairman of the Directors Joaquim Filipe Marques dos Santos Chairman of the Executive Board 8

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11 01 Economic Background 1. THE INTERNATIONAL ECONOMY The financial year of 20 produced one of the highest rates of growth of the last decade the World Bank estimates that the global economy grew by approximately 4% due essentially to stimulus from the Chinese, American and Japanese economies, and a more favourable money supply, as interest rates remained at historically low levels. However, the year was also marked by a series of factors which are more usually associated with an economic slowdown: oil prices reached an all-time high at dollars and the American Federal Reserve started on a new cycle of interest rate hikes after two years of stability. The year also witnessed the historical expansion of the European Union to 25 members, taking in ten Eastern European nations, and the re-election of George W. Bush, in a scenario of continued political instability in Iraq and Palestine. From a strictly economic point of view, there were a number of major developments in 20. Unlike previous oil shocks, the sudden rise in oil prices from the second quarter onwards had only a moderate impact on the pace of growth and the inflationary effects were short lived. The pace of growth in the Chinese economy remained fairly high, at around 9%, as against 15% in the previous year, despite expectations of an abrupt deceleration. The US budget and trade deficits, generally known as the twin deficits, worsened, meaning that careful attention still needs to be paid to readjustment. Japan recorded the highest rate of growth for 13 years and appears to be on the verge of overcoming the problem of deflation. And finally, the European bloc recorded almost anaemic growth, as the Euro shot up in value and unemployment stagnated. The US economy is estimated to have grown by approximately 4.3% in 20, but this healthy figure conceals an uneven trend over the course of the year. First quarter growth was impressive, with GDP up 4.5% between January and March in comparison with the previous quarter, but this was followed by a more ambiguous period, with most consumer and business confidence indexes 11

12 showing a downward trend. This was probably due to a combination of factors, such as the end of fiscal incentives for families, the prospect of an impending rise in the Federal Reserve interest rates, the slack rate of job creation and the upward trend in oil prices. In particular, and although it grew by approximately 4.3%, the US economy generated employment at lower levels than is normal in similar phases of the cycle, which caused concern to analysts and investors over much of the year. Towards the end of 20, with oil prices stabilizing and a palpable recovery in business confidence (not unrelated to a package of fiscal incentives for investment) and the capital markets, most indicators showed more positive signs, which permitted the US economy to close the final quarter with growth estimated at 4.0%. As regards inflation, 20 made it possible to set aside fears of deflation, which had caused so much concern to the monetary authorities in Nonetheless, whilst rising oil prices naturally affected the current inflation rate, the underlying rates, which exclude food and energy prices, suffered significantly less, and fluctuated between 1.1% and 2.2%, a more comfortable level from the perspective of the central banks, and the Federal Reserve in particular. The Euro Zone appears to have recovered at a significantly slower rate than other regional blocks in 20, with output up by approximately 1.8%. Despite a relatively encouraging start to the year, the combine effect of the rise in oil prices and the strong appreciation of the Euro took their toll on the European economy, which is the largest exporter bloc in the world and consequently very sensitive to sudden changes on the foreign exchanges and in external demand. In addition to this, the slowdown experienced from the summer onwards was probably due in the main to the less positive signals coming out of the American economy in the preceding months. In general, the current problem facing the European economy lies in the slackness of domestic demand, due to a significant extent to stagnation in the labour market (the 12

13 01 Economic Background 1. THE INTERNATIONAL ECONOMY (cont.) unemployment rate has held steady at between 8.9% and 9.0% since March 2003). Japan recorded in 20 its highest rate of growth since the early nineteen nineties, with output rising by approximately 4.3%, stimulated essentially by external demand and, in particular, by China. In effect, the pattern of Japanese growth has a number of similarities with the European situation, given the importance of external demand, as opposed to domestic demand, as the engine of growth. Curiously, although the labour market recovered somewhat over the course of the year, with the jobless rate dropping from 5% to 4.5%, in keeping with an across-the-board improvement in business confidence indicators, consumer confidence indicators fluctuated significantly over the course of the year, hitting the lowest point for the year in December. Despite this, 20 can be regarded as a fairly positive year for Japan, not only because of strong economic growth but also because there were encouraging signs of an end to deflation: the November year-on-year inflation rate stood at 0.8%, and there were several months with zero price increases (instead of negative variations). 13

14 % GROWTH IN GDP (REAL VARIATION RATE) EU USA JAPAN The principal Asian economies maintained a pace of growth in line with the trends observed in 2003, with growth, even so, remaining fairly high (at approximately 7.8%), driven by lively internal demand, which in turn helped to increase the volume of trade at global level. China s importance in this context continues to grow, in the wake of its recent accession to the World Trade Organization. Accordingly, although widely-held expectations in early 20 pointed to a sudden slowdown in the Chinese economy, the country recorded growth for 20 of 8.8%. This was a historic year for Eastern Europe: on May 1, ten new countries joined the European Union (EU), in what in numerical terms was the largest ever expansion of the Union in its history. It is also the most challenging, given the stage of economic development of most of the new members. The new EU members include Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. In general, the group has 14

15 01 Economic Background 1. THE INTERNATIONAL ECONOMY (cont.) recorded fairly solid rates of growth, at around 5% on average, reflecting flows of foreign investment associated with integration, although they face ongoing challenges as concerns consolidation of budgetary policy. As a whole, Eastern Europe, including non-member countries, and Russia in particular, is estimated to have recorded growth of approximately 7.0% in 20, as against 5.9% for the previous year. Latin America benefited in 20 from a number of positive factors, which allowed it to record a rate of growth in the region of 4.7%, well above the level for Continued low interest rates in the US (much of the foreign debt of these countries is dollar indexed) helped to maintain financial stability, enhancing the benefits of orthodox economic policies, whilst the export sector was also stimulated by demand from China and also by favourable trends in raw materials prices. Brazil merits special mention in this respect, giving recorded growth of 4.5% in a context of falling inflation and budgetary consolidation: the year-on-year inflation rate ended the year at 7.3%, as against 9.3% in the previous year, whilst the budget deficit fell from 5.2% to 3.0% of GDP. In effect, the decision to embrace orthodox economic policies the Brazilian government has set itself the target of a primary surplus of 4.5% and the central bank has been particularly careful in its management of inflationary risks, having increased its rate by 1.25% over the year as a whole was eventually reflected in the rise of the Real against the Dollar by 8% over the year, and in the narrowing of the main reference for Brazilian risk (the spread of the EMBI+ index) to 383 bps, an unprecedented level for this country. The harmonization of monetary policy, especially in the English speaking world, was another of the main themes of 20, with the American Federal Reserve increasing its reference rate by 125 base points, from 1% to 2.25%, in the space of six months, after almost two years of stability. The hike in rates 15

16 was due more to the need to tighten monetary policy the real interest rate had remained negative for a large part of the ear than to any type of inflationary pressures, given that the inflation rate remained within a relatively comfortable band. Despite rising oil prices (between December 2003 and the peak in October 20, the WTI index rose 92%), the underlying inflation indexes, which seek to measure price trends excluding more volatile factors and which the monetary authorities follow more closely, reacted very moderately. If we exclude oil, the factors which most contribute to creating inflationary pressures (high capacity utilization rates in manufacturing and an overheated labour market) remained absent from both the USA and Europe, which explains the European Central Bank s decision to keep its reference rate at 2% throughout the year. % INFLATION (YEAR-ON-YEAR RATE) EU USA JAPAN 16

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18 01 Economic Background 2. THE PORTUGUESE ECONOMY % CENTRAL BANKS (LEADING RATES) Dec-02 Apr-03 Aug-03 Dec-03 Apr- Aug- Dec- FED ECB The Portuguese economy recorded uneven growth over the course of 20, due to internal and external factors. Although consumer confidence remained fairly poor throughout the year, the 1st half witnessed an upturn in the rate of growth, with GDP growing by approximately 1.4% in the 1st quarter and by 2.1% in the 2nd, stimulated essentially by external demand and investment. However, there was an abrupt turnaround in this trend in the summer months, and the rate of growth is estimated to have slowed to approximately 0.8%, due above all to a negative net contribution from net external demand, reflecting both an acceleration in imports and a slowdown in exports, which once again brought down the country s external balances. Over the year as a whole, the Portuguese economy is thought to have grown by 1.1%, which is nonetheless a recovery after negative growth of 1.3% in In any case, performance was below the community average, which puts Portugal even further behind in the process of real convergence within the Euro Zone. 17

19 % GROWTH IN GDP (REAL VARIATION RATE) (E) PORTUGAL EU In terms of the breakdown of GDP, the largest contribution to economic performance in 20 appears to have come from the export sector, with growth in the order of 6.8%, although consumer spending also rallied remarkably (up 2.2%, as against to negative growth of 0.7% in 2003) in view of the worsening of the labour market (unemployment up from 6.5% to 6.8% in the 3rd quarter) and stagnation of real salaries. The stimulus from external demand appears to have been critical in boosting capital expenditure, which after falling by 9.6% in 2003, grew by an estimated 1.9%. Finally, in the field of public spending, the restrictive framework imposed by the Stability and Growth Pact remained in place, with public spending growing at a modest rate, in line with that recorded in 2003 (0.6% as against 0.5%). 18

20 01 Economic Background 2. THE PORTUGUESE ECONOMY (cont.) CONSUMER CONFIDENCE (INDEX) (E) PORTUGAL EU Despite the economic recovery, the Harmonized Retail Price Index (HRPI) was down on 2003, falling from 3.3% to approximately 2.5%, although this reduction conceals a degree of intra-annual volatility, caused by the rise in oil prices. % INFLATION (RETAIL PRICE INDEX) (E) PORTUGAL EU 19

21 In relation to external accounts, and contrary to initial expectations, the balance of payments on current account worsened in 20, and in combination with the capital account reached -5.4% of GDP, as against -3.6% in This was due above all to the deterioration of the trade balance in the second half of the year, as referred to above.. 20

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23 3. THE FINANCIAL SYSTEM 3.1 OVERVIEW Despite the improvement in the domestic economy, the Portuguese banking sector continued to be faced with a challenging situation, especially in view of the brokerage margin due to continued low interest rates, added to which it was not able to benefit from a capital markets situation as favourable as in In this context, the strategic focus continues to be on improving efficiency standards, which in terms of revenue means increased cross-selling of products, and in terms of costs means cutting staff and closing branches. Despite the pressures from the economy, a number of strategies have begun to emerge for taking advantage of the recovery, albeit only incipient, in the Portuguese economy. Although GDP started to grow again in 20, total lending was down on 2003 (October 20 figures), in both the business and private sectors. Total lending to private customers fell by approximately 5.7% between December 2003 and October 20, with the drop of 11.5% in the housing segment contributing significantly to this performance, given that consumer credit contracted by approximately 2.4% and other lending grew by 11%. 20

24 01 Economic Background 3. THE FINANCIAL SYSTEM (cont.) 3.2 MONEY MARKETS AND FOREIGN EXCHANGES The worsening of the US budget and trade deficits was a major topic of debate over the course of the year, reinforcing the widely held view that depreciation of the Dollar was needed to restore a degree of balance to the balance of payments and to slow down internal demand. The Dollar consequently fell by approximately 7% against the Euro, although this trend was sharper in the final part of the year, especially in the period following the US presidential elections, with the exchange rate closing the year at /Euro as against at year-end The downward pressure even managed to override the fact that differentials between the money market curves have fallen in favour of the American side, due to increases in the Federal Reserve rates in the face of interest rate stability at the ECB. In relation to the Yen, the Dollar s losses were partially mitigated by the foreign exchange intervention of the Bank of Japan, which has sought not only to protect Japan s export sector but also to avoid renewed risks of deflation through exchange rate management. The Dollar accordingly closed the year at yens/dollar, as against at year-end EXCHANGE RATES DOLLAR/ YEN DOLLAR / EURO 21

25 Euribor rates presented a healthy yield curve for nearly all the year, although the steeper climb in the Euro in the final quarter contributed to a flatter curve, incorporating expectations of postponement of rate rises by the ECB or even of a fall, if the rate of appreciation had continued. In general, rates stayed at practically the same level as the previous year, with minimal fluctuations: the 3 month rate closed at 2.16% (up 3 base points), the 6 month rate at 2.22% (up 5 base points) and the 12 month rate at 2.36% (up 5 base points). The 1st quarter constituted an exception to the overall pattern for the year, because of the doubts accumulating at the time as to the health of the US economy, which were subsequently dispelled. % EURIBOR RATES (YIELD CURVES) 3M 6M 9M 12M

26 01 Economic Background 3. THE FINANCIAL SYSTEM (cont.) 3.3 BOND MARKET No overall clear trends emerged from the bond market in 20: although, at the start of the year, expectations of strong economic growth, with the inevitable inflationary impact deriving from this, pointed towards significant falls in bond prices, i) fears of an economic slowdown worldwide as a result of rising oil prices, ii) the poor performance of the labour market and iii) the fact that inflation remained within a perfectly comfortable band from the point of view of the central banks, caused prices to remain stable or event to register gains. As a result, the rate of return on American 10-year bonds stayed within a band of 4.0% to 4.2% for a large part of the year, although it occasionally dropped below 4.0%, a level which is normally interpreted as indicating expectations of recession. In some cases, the rate hikes by the Federal Reserve, in a context of sharply rising oil prices, accentuated these decreases, causing the yield curve to flatten off over the year. In addition, there was another major factor influencing the prices of US bonds in addition to the respective fundamentals, the impact of which it is difficult to measure: the massive buying of US treasuries by Asian central banks, and especially those of China and Japan, which channelled into these bills the dollars acquired as part of their foreign exchange policies. This policy has in fact been regularly mentioned as the main reason why the yields on US bonds have remained at a relatively low level, not justified by the imbalance in American budget and trade accounts. The situation in Europe was not significantly different, although in this case there were no rate hikes from the European Central Bank and fears of an economic downturn have been generated above all by the appreciation of the Euro against the Dollar, which in itself is a sign of monetary restrictions. In this context, and insofar as, from the American side, doubts about the future of the economy have been mitigated, the differential in 10-year interest rates 23

27 between the two blocs widened to an almost unprecedented extent: whilst, at year-end 2003, the difference was 5 base points, in favour of the US, in December 20, the differential had turned around to 54 base points, revealing a reduction in the correlation between the two curves. This reduction is unusual, but fairly much in keeping with the fundamentals of the two economies. % GERMAN TREASURY BONDS (YIELD CURVE) 2 YEARS 5 YEARS 10 YEARS The Portuguese yield curve accompanied the movements in the Euro bloc, in particular the fall observed in the 1st quarter and the strong downwards trend in the last quarter, which caused the Treasury Bond yield to drop to a historic low, of 3.68%. The differential in relation to equivalent German bonds fluctuated between 10 and 15 base points over the course of the year. 24

28 01 Economic Background 3. THE FINANCIAL SYSTEM (cont.) 3.4 THE EQUITY MARKET The equity markets repeated the pattern of gains observed in 2003, albeit on a smaller scale and a degree of volatility over the course of the year. In general terms, we may identify a number of factors which led to this positive performance on the equity markets: favourable money supply conditions, due to interest rates at historic lows, led investors to prefer equities, whilst solid economic growth and high levels of productivity pushed up corporate profitability. At the same time, a commitment to shareholder remuneration, with the payment of bonus dividends and share redemption schemes, continued to be well received by the investment community. Despite this, market performance was rather patchy over the year, and can be divided into three main periods: i) the 1st quarter brought fairly positive performance as a result of expectations of strong growth in the American economy (output had grown by 7.4% in the 3rd quarter of 2003), generating optimism as to the evolution of corporate business; ii) from April onwards, rising oil prices and a wholly unexpected turnaround in the US labour market brought fears of an economic downturn, which was borne out by a drop in yields on treasuries, causing markets to hit their annual low in August; iii) insofar as this adjustment resulted in more attractive valuations and as some of the doubts about the economic future were dispelled, the markets recovered some ground but only recorded sustained gains after the US elections in November. 25

29 EQUITY MARKETS S&P EUROSTOXX50 PSI20 Most markets ended 20 with yields of between 5% and 10%: Standard & Poors rose by approximately 8.9%, Eurostoxx gained 6.9% and the Nikkei rose by 7.6%. In Europe, the top performing markets were in Spain (17.4%), Italy (15.0%) and Portugal (12.6%), which continued to offer amongst the best returns in the Euro Zone for a large part of the year. One sign of increased stability on the equity markets, after the depression of , was the number of initial public offerings, which in the US included the stock market launch of Google, the world s largest internet search engine. The Portuguese market also witnessed, for the first time since 2000, the floating of a new company to the market: Media Capital, which owns the TVI television channel, as well as a number of radio stations and advertising businesses. The operation was valued at 217 million Euros, and attracted both corporate and retail clients, generating great interest amongst foreign institutional investors. 26

30 01 Economic Background 3. THE FINANCIAL SYSTEM (cont.) In a relatively more favourable context, trading increased by approximately 37%, from 21.7 thousand million Euros to 29.8 thousand million Euros, although a significant part of this increase was associated with specific transactions and the transfer of large blocs of some of the main securities on the market. 3.5 RETAIL MARKET The retail market performed unevenly, with regard to interest rates, with some segments seeing lending rates fall whilst others benefited from falls, although the variations were practically marginal. In the case of finance houses, interest rates for lending operations of up to one year held practically stable at around 3.5% between December 2003 and October 20, with fluctuations of between 5 and 10 base points, depending on the segments. The same scenario was to be found in relation to lending rates for private borrowers over periods of more than 5 years (essentially mortgage lending). These rates held steady at around 3.4% from December 2003 to October 20. In relation to deposit rates offered by banks over the same period, the average deposit rates for up to one year and longer remained at 1.8% for private customers and 2.1% for the business segment. 27

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32 02 Banif Operations in BUSINESS IN MADEIRA With implementation of the final phase of the government programme, the regional economy recorded growth in comparison with the previous year (estimated growth in GDP of 6.6%), with obvious repercussions for the development of Banif s business in the region. Given the economic situation during the year, sustainable growth in the business of the Madeira Commercial Division (MADCD) was supported by an increase of 12% in lending, which offset slower growth in deposits, which stood at 7%. In terms of total financial contribution, the MADCD obtained excellent levels of growth (15%), thanks to a large increase in commissions charged (16%) and healthy growth in the financial contribution from deposits and lending (14%). The increase in investment lending, reflecting the positioning of the Bank within the regional business community, counterbalanced fading growth in consumer credit. In order to revive short/medium term lending, the MADCD also worked in partnership with regional institutions to promote the granting of credit lines for the acquisition of specific consumer goods. Growth in deposits, although less significant than in the same period in the preceding year, was based on increased intake from residents, given that the depreciation of the Dollar against the Euro made it difficult to increase deposits from non-resident clients. As part of the 50,000 Programme (a project developed by the Bank in 20, in collaboration with external consultants, with the aim of extending our active client base by 50,000), commercial agreements were signed with a number of public and private bodies, which helped the Bank to maintain a significant share of the regional market and to bring in 9,000 new active accounts. 29

33 The extension of the branch network, with the opening of the Cancela Park branch and the creation of the sixth customer service team at the Regional Business Centre made it possible to maximize quality standards in the provision of a personalized service to current and potential clients. In order to increase the Bank s visibility in the region, Banif signed new sponsorship and arts patronage contracts which show the Bank s commitment to promoting social welfare and culture in the region. The bank s high profile in the business community was further boosted by sponsorship of the regional 100 Best Companies competition. In the area of sport, in addition to sponsorship of the now traditional Banif Golf Tournament and sponsorship of Clube Sport Marítimo, Banif has increased its visibility by also signing a sponsorship deal with Clube Desportivo Nacional. In the academic world, a cooperation agreement was signed with the University of Madeira, and the bank again supported the School Games event, which involves basic and secondary level schools in the region. In addition to periodic visits, the Bank s efforts to support and keep in touch with the Portuguese community abroad included the Banif Golf Tournament held in South Africa, in January, and support for the organization of the 3rd Meeting of Generations, held in Venezuela in May. 30

34 02 Banif Operations in BUSINESS IN MADEIRA (cont.) VAR. 20/2003 Lending 12% Deposits 7% Client Base 10% Total Financial Contribution 15% 31

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36 02 Banif Operations in BUSINESS IN MAINLAND PORTUGAL 2.1 Business in the Corporate Segment At the end of 20 it was decided to merge the Business Centres Division (BCD) with the High Income Private Clients Division (HIPCD), creating the Corporate and Private Banking Division (CPBD), whose task it is to coordinate and develop corporate banking operations in Mainland Portugal, managing existing clients and helping to bring in new clients, together with the bank s business in the medium/high income private clients and institutional segment. Over the course of 20, the CPBD (previously the BCD) pursued its traditional task of following through and managing the portfolio of small and medium sized businesses, through the various Business Centres (and branches) in mainland Portugal, continuing with the strategy of direct placement of products and services, but also as a channel supplying business to other areas of the Bank. Lending policies remained rigorous, with moderate growth based on forms of credit able to provide the greatest financial contribution, especially in terms of commissions. 31

37 Customers with warning signs as regards credit risks have continued to be closely monitored, with a view to minimizing risks, namely through: - plans for eliminating and reducing involvement with higher risk clients; - reduction of overall exposure in some sectors where difficult economic conditions have been felt most acutely. In terms of cross-selling with other Group companies, the bank achieved the following: - growth of 15% in the placement of leasing products (property and equipment), in comparison with 2003; - growth in insurance premiums of 218%; - totals of 9.9 million Euros and 1.1 million Euros placed in investment funds retirement savings schemes, respectively, over the course of the year. In 20, Banif consolidated its strategy of stepping up the placement of new products, such as factoring, credit cards and renting, with these clients, as well as boosting take-up of the Banif@st e-banking service. A good flow of customer contacts were provided to the branch network with the potential for Cash Management Accounts (CMA) and home loans. This was also the first full year of factoring business, which started up in This project is being conducted by the Bank, through the former BCD. Taking advantage of the existing relationship with the Bank s corporate clients, a busy sales campaign led to the signing of 112 new contracts. With a view to bolstering Banif s presence in the corporate segment, the number of client service teams was increased with the creation of 2 new teams in Portimão and Viana do Castelo, bringing the total up to 51 at the end of

38 02 Banif Operations in BUSINESS IN MAINLAND PORTUGAL (cont.) As a result of these marketing efforts, the CPDB recorded growth in lending of 7.7% over the year, representing an increase of 122 million Euros. Commissions were up by 17% which, added to the financial contribution from lending and deposits (financial brokerage margin), represents an increase in the total financial contribution of approximately 6.9% in comparison with It should also be noted that the Bank gained 866 new corporate clients, bringing the total number up to 5,785 active clients at the end of 20. VAR. 20/2003 Lending 7.7% Deposits -12% Client Base 10% Total Financial Contribution 6.9% 2.2 Business in the Middle/High Income Private Client Segment The decision, referred to above, to combine corporate and middle/high income private clients in a single division was designed above all to exploit and develop synergies between these two market segments, namely by attracting the private custom of the partners/shareholders of the Bank s corporate clients. With 11 Private Managers in Mainland Portugal at the end of the year, business was taken over by two Banif Privado Centres, one in Oporto and the other in Lisbon (with a branch in Faro). Targeting their work increasingly on the business segment, the Private Managers have sought to bring in deposits from business people and to place other Banif products and services, through a strategy of strengthening customer loyalty and cross sales. 33

39 Each Private Manager now works in close connection with the Corporate Managers for their respective areas of influence, thereby benefiting from the synergies offered by this new approach. The two Banif Privado Centres currently manage approximately 1,200 clients, with deposits in the region of 533 million Euros and lending of 38 million Euros. The Centres have meanwhile been successful in increasing the average number of products per client in Banif Privado, thanks to the strategy of cross-selling, thereby increasing customer loyalty to Banif. There has been increased coordination with Banif Banco de Investimento, allowing for significant growth in the distribution of investment products. In 20 this included the placement of 33 million Euros in investment funds, 40 million Euros in structured products and approximately 700 thousand Euros in retirement savings schemes. The new strategy defined at the end of 20 will be founded on consolidating the existing client base, in attracting the custom of the partners/shareholders of corporate clients, improving returns and reducing the cost to income ratio in this business area, taking advantage of synergies with the Business Centres and Banif Banco de Investimento. 2.3 Business in the retail segment During 20, the Branch Network Division (BND) continued primarily focused on selling products and providing services, aimed essentially at private clients, professionals and small businesses. 34

40 02 Banif Operations in BUSINESS IN MAINLAND PORTUGAL (cont.) The main role in marketing strategic products (home loans, Cash Management Accounts, cards and personal loans) is taken by the branches, together with that of maintaining a good level of deposits and exploiting the potential of cross-selling with other group companies. At present, the BND has a structure comprising 123 branches in Mainland Portugal, including 6 which first opened their doors during the financial year Lamaçães (Braga), Lagoa, Cacia, Vizela, Ponte de Lima and Barreiro. In an increasingly competitive marketplace, special attention has been paid to the image of branches as perceived by customers, and various changes have been made to branch premises, to bring them up to date. The financial year of 20 was marked by two major projects, the 50,000 Programme and the implementation of the New Branch Software. In 20, the Branch Network Division recorded fairly positive growth in deposits, which were up by 12% to a total of 1,134 million Euros. The division recorded growth of approximately 10% in lending, corresponding to an increase of 141 million Euros, with the best results in lending to small business (up by 4%), credit cards (up by 7%) and home loans (up by 13%). As at 31 December 20, total lending stood at 1,538 million Euros. Banif has been successful in attracting its clients to its e-banking service, Banif@st, with appreciable advantages in terms of bringing the bank closer to its customers, and vice versa, and reduction of operating costs. At year-end 20, the take-up rate stood at 61.7%, and of the clients registered for the service, approximately 15% were regular users. 35

41 Efforts continued in 20 to improve working links with the Agency Channels Office, which helped to channel customers and business to the branches. The BND s total financial contribution in 20 grew by only 4% over the previous year, as a result of the squeeze on the financial brokerage margin on lending, in view of greater growth in home loans, and the receipt of extraordinary commissions in the 1st half of 2003, relating to the securitization of mortgage lending. VAR. 20/2003 Lending 10% Deposits 12% Client Base 16% Total Financial Contribution 4% 2.4 Home Loans Banif s mortgage lending business continued to develop positively, growing in absolute terms at exactly the same rate as in Against the background of a clear slowdown in demand, the bank was once again able to increase its market share, which is estimated to have risen from 1.63% to 1.68%. At the start of the year, total mortgage lending stood at 1,248.4 million Euros (Mainland: 1,031 million Euros and Madeira: million Euros), corresponding to approximately 24,500 contracts. 36

42 02 Banif Operations in BUSINESS IN MAINLAND PORTUGAL (cont.) During the financial year of 20, this total increased by million Euros, representing growth of approximately 14%, the average LTV standing at 52%. Total lending under Banif s management, including securitized home loans, therefore amounted to 1,418.8 million Euros (Mainland: 1,162.9 million Euros and Madeira: million Euros), corresponding to approximately 27,500 contracts. The securitized balance stood at million Euros at year-end. The balance of home loan transfers continues in Banif s favour, demonstrating our quality in terms of competitive products, the speed of processing applications and aggressive sales stance. The market remains fiercely competitive, with constant marketing campaigns, new product variants and aggressive pricing policies on the part of certain operators. Although it is not immune to these pressures, Banif managed not to alter its pricing policy and to preserve margins, staying close to the market averages. In the course of the financial year, Banif also started to market two new products with specific features. These are Banif Holiday Home Loans and Banif Capital+ Home Loans (offering our customers the possibility of a 3-year grace period on the principal), which helped us to broaden our range to include these market niches. We may therefore once again conclude that, in view of the ferocious competition in this market, our results can be regarded as a clear success. 37

43 2.5 Consumer credit - Payment cards Banif s payment card business continued in 20 to be influenced by the recession in the Portuguese economy. This recession, combined with the fact that the population already presents a high bank card coverage rate, caused the market to record only modest growth, of only 2%, in the number of cards in Portugal. In contrast with the wider market situation, Banif recorded growth of approximately 19% in the number of cards issued, in comparison with 2003, allowing it to increase its market share considerably. The best-performing product was the Banif Electron Card, a Visa network debit card, for which the number of cards issued was up by 22% in comparison with the previous year, and the number of transactions up by 50% over The Excellence Card, a Visa Gold card, also performed well, with growth in various indicators: number of cards (10%), lending (12%) and invoicing (17%). Revolving credit (interest generating) granted by Banif cards also grew at a healthy rate, up by 18% on the previous year. Over the course of 20, Banif undertook various direct marketing initiatives for credit cards sales, with the Call Centre taking a leading role. At the end of 20, Banif launched a new card, the Banif University Card. This card, which in financial terms serves as a Visa Electron debit card, is aimed at students, lecturers and other employees of higher education institutions 38

44 02 Banif Operations in BUSINESS IN MAINLAND PORTUGAL (cont.) with which Banif has reached agreements, providing, amongst other things, for the issue of cards. This card also serves as an identity card for the university. Over the course of the year, the bank also took an active part in Visa s promotional campaign in Portugal, with the slogan Go to the Olympics with Visa. Three prizes in this campaign were awarded to customers with Banif cards. - Personal loans In 20, Banif maintained the general thrust of its positioning with regard to the placement of consumer credit products. The placement of personal loans continued to be centred on sales to wellestablished Banif clients with a good track record. Personal loan products were used less to win new customers than to bolster customer loyalty, with preferential terms for the bank s existing clients. Lending to non-clients or recent clients represented only 14% of production in 20, as against 33% in The branches are the main distribution channel for personal loans, strongly supported by the Agency Channels and the Call Centre. The partnership with Banco Cetelem SA continued in 20 on products aimed at specific segments, making it possible to broaden the range of products offered to Banif customers, especially with regard to pure revolving products and low value loans. 39

45 Business in 20 (excluding the partnership with Banco Cetelem, SA) amounted to the granting of 3,759 new loans for a total of 38,917 thousand Euros, representing an increase in value of 6% over 2003, although with a reduction of 8% in the number of contracts. The average value of new loans rose from 9,012 Euros to 10,353 Euros, as a result of specialization in lower value loans through the partnership referred to above. Banif recorded a decrease in its personal loans portfolio from 1.1 million Euros in December 2003 to 94.5 million at year-end 20, corresponding to a reduction of 9%, due to a high rate of repayment of principal, not offset by new lending. Various initiatives were launched in 20 in order to boost sales of personal loans to customers, in partnership with Banco Cetelem. These included: - Banif Prestige Audiovisual Offer Campaign - Film and Photography Campaign - Banif Pessoal Summer Promotion Campaign -Pre-approved Credit to customers with positive track record The success of the Banif Pessoal Summer Promotion Campaign was partly responsible for the recovery in output during 20. In December 20, as a result of internal reorganization, management of Banif personal loans products was transferred to the new Consumer Credit Division. In 2005, new initiatives will be launched with a view to exploiting the client base provided by the 50,000 Programme, implemented in 20, and new products will be developed aimed at specific segments. 40

46 02 Banif Operations in BUSINESS IN MAINLAND PORTUGAL (cont.) 2.6 Specialist Credit - Factoring The Bank s factoring unit concluded in December 20 its first full year of operation. Taking advantage of the existing relationship with Banif s corporate clients, marketing efforts for factoring were stepped up, with 112 new contracts being signed in 20. Active contracts made a contribution of 147 million Euros in credit granted, of which 46.6 million remained as active credit at 31 December. This enabled Banif to achieve a market share of 1% in this product by the end of the year. This level of business generated commissions of 514 thousand Euros. The average balance of advances stood at 45.6 million Euros in December, and interest of approximately 1 million Euros was collected during Cash Management Account Growth in the Cash Management Account stagnated somewhat in 20 in relation to small businesses, and individual entrepreneurs in particular, who are the target market for this product. The prime marketing weapon continues to be cooperation agreements with business associations, for the placement of this product with their members. The indicators for this product remained firm and stable in 20, both in terms of client numbers and credit granted, with a credit balance of million Euros, used by a total of 16,338 clients. In December 2003, this 41

47 balance had stood at million Euros, meaning that growth in 20 stood in the region of 3.8%. Lending associated with this account also held firm, with a total balance of 36.6 million Euros, corresponding to growth of 11.9% in relation to December 2003, when the balance stood at 32.7 million Euros. The stability of this portfolio was also due to a clear improvement in credit quality, achieved over the year by shedding higher risk clients, and by reviewing scoring grids and policies for associated lending. Plans are afoot for reviving this product in 2005, through renewed marketing, realignment of product pricing and the offering of new forms of the product. 2.7 New Distribution and Business Area Support Channels Call Centre Operations The Direct Network Division (DND) conducted a number of campaigns in 20 aimed at clients and potential clients. These initiatives included work in the business segment, aimed essentially at potential clients, promoting placement of the Cash Management Account, through cooperation agreements with industrial and commercial associations. In the area of lending to private clients, with the focus on personal loans, activities centred on support for the Audiovisual and Pre-approved campaigns, and on the pro-active placement of credit cards. 42